After moving alone in 2020 to reform its Community Reinvestment Act (CRA) regulation, the Office of the Comptroller of the Currency (OCC) has joined the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Board in issuing a joint notice of proposed rulemaking setting forth proposed amendments to their regulations implementing the CRA.  The action follows the OCC’s rescission in December 2021 of its 2020 CRA final rule and replacement of that rule with one that is largely based on the OCC’s 1995 CRA rule adopted jointly with the Federal Reserve and FDIC.  The OCC’s 2020 final rule, which was welcomed by some OCC-supervised institutions and widely criticized by consumer advocates, represented a change from a ratings system that was primarily subjective to one that was primarily objective.  While the agencies have acknowledged concerns about subjectivity in the current proposal, further review of the proposal is needed to determine whether the proposal adequately addresses those concerns.  Comments on the NPR must be received on or before August 5, 2022.

Below we provide highlights of the proposal.  In the coming weeks, we will explore the proposal in more detail, including how the proposal differs from the OCC’s rescinded rule, how assessment areas are delineated, the Community Development Test, and the impact of the rule on small, intermediate, and large banks.

Highlights of the proposal include the following:

Assessment areas.  Banks would continue to delineate facility-based assessment areas where they have their main offices, branches, and deposit-taking remote service facilities.  However, the proposal would tailor the geographic requirements for delineating facility-based assessment areas based on bank size.  For large banks, wholesale or limited purpose banks, such assessment areas would be required to consist of: (1) one or more Metropolitan Statistical Areas (MRAs) or metropolitan divisions; or (2) one or more contiguous counties within an MSA, metropolitan division, or the nonmetropolitan area of a state.  Consistent with current practice, small and intermediate banks could delineate facility-based assessment areas that include a partial county.

The proposal would require large banks to also establish retail assessment areas in any MSA or combined non-MSA areas of a state, respectively, in which it originated in that geographic area, at least 100 home mortgage loans, or 250 small business loans, outside of its facility-based assessment area.  Small and intermediate banks would not be subject to this requirement.  In the retail assessment areas, large banks would be evaluated only under the Retail Lending Test, and not under other performance tests.

Under the proposal, retail loans located outside any facility-based assessment area or retail lending assessment area for a large bank and outside of any facility-based assessment area for intermediate banks with substantial outside assessment area lending, would be evaluated on an aggregate basis at the institution level as part of the Retail Lending Test.

In addition to evaluating the community development performance of large banks, wholesale and limited purpose banks, and intermediate banks that elect evaluation under the Community Development Financing Test within each facility-based assessment area, the proposal would consider any additional qualifying activities that banks elect to conduct outside of facility-based assessment areas.  A bank would receive consideration for any qualified community development activity, regardless of location, in its overall rating, while being separately assessed for their performance in each of its facility-based assessment areas.

Performance Tests, Standards, and Ratings.  The evaluation framework would include four tests: a Retail Lending Test, a Retail Services and Products Test, a Community Development Financing Test, and a Community Development Services Test.  The proposal substantially retains the current lending test for small banks and the community development test for intermediate banks.  The four tests would apply as follows:

  • Large banks (those with assets of at least $2 billion) would be evaluated under all four tests;
  • Intermediate banks (those with assets of at least $600 million and less than $2 billion) would be evaluated under the Retail Lending Test and under the current community development test, or at the bank’s option, the proposed Community Development Financing Test; 
  • Small banks (those with assets of less than $600 million) would be evaluated under the current small bank lending test or, at the bank’s option, the proposed Retail Lending Test;
  • Wholesale and limited purpose banks would be evaluated under a modified Community Development Financing Test; and
  • Banks of all sizes would retain the option to request approval to be evaluated under an approved strategic plan.

Under the proposal, a bank’s “operations subsidiaries” or “operating subsidiaries” would be included in the evaluation of a bank’s CRA performance, with banks retaining the current ability to choose to include or exclude the relevant activities of other bank affiliates.  This approach follows from the agencies’ view that evidence of discriminatory or illegal practices by such subsidiaries should be factored into a bank’s performance evaluation because their activities would be considered to be a component of the bank’s own operations.

The proposal includes five performance scores: Outstanding, “High Satisfactory,” “Low Satisfactory,” “Needs to Improve,” and “Substantial Noncompliance.”  Scores would be assigned for each applicable performance test at the assessment area level, as well as the state, multistate MSA, and institution levels.  A bank’s rating would be based on combining the scores from its performance test in, as applicable, states, multistate MSAs, and at the institution level.  A bank would receive one of the four statutorily-required ratings: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.”

Retail Lending Test.  The proposal is intended to standardize retail lending evaluations through the use of retail lending metrics and establish performance standards based on local and tailored benchmarks as follows:

  • A product line (closed-end mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, small farm loans, automobile loans) would generally be considered a major product line if it constitutes 15 percent or more of the dollar value of a bank’s retail lending in a particular assessment area over the evaluation period.  An agency would evaluate a bank’s performance in lending to low-and moderate income (LMI) individuals and communities separately for each major product line.
  • A Retail Lending Volume Screen would be used to compare the ratio of a bank’s retail lending to deposits to that of other banks in the same facility-based assessment area.  If a large bank’s ratio meets or exceeds 30 percent of the aggregate (market) ratio, the bank’s major product lines would be evaluated under the geographic and borrower distribution metrics approach.  For large banks that do not pass this screen, examiners would review performance context information that is specific to a bank’s level of retail lending in a facility-based assessment area to determine if there is an acceptable basis for the bank not meeting the retail lending volume screen.  If those factors do not account for the bank’s low volume of retail lending, the bank would only be eligible for a Retail Lending Test score in a facility-based assessment area of “Needs to Improve” or “Substantial Noncompliance.”  For intermediate banks and small banks that elect to be evaluated under the Retail Lending test, failing to pass the screen would be a qualitative consideration that could adversely impact Retail Lending Test scores for facility-based assessment areas.
  • To evaluate retail lending for each of a bank’s major product lines in its facility-based assessment areas and, as applicable, retail lending assessment areas and outside retail lending areas, the following metrics and calculation methods would be used:
    • Geographic distribution metrics would evaluate a bank’s record of serving, respectively, low-income census tracts and moderate-income census tracts.      
    • Borrower distribution metrics would evaluate a bank’s retail lending to respectively, low-income borrowers, moderate-income borrowers, small businesses with revenues below or between certain thresholds, and small farms with revenues below or between certain thresholds for each of a banks major product lines except multifamily.
    • To calculate these distribution metrics, the number of a bank’s retail loans, rather than the dollar amounts, would be used to avoid weighing larger dollar loans more heavily than smaller dollar loans.  A bank’s metrics would be measured against corresponding market and community benchmarks reflecting, respectively, aggregate retail lending in an assessment area and community characteristics.  An agency would assign a bank’s recommended Retail Lending Test performance score based on the application of the metrics and benchmarks in an assessment area in conjunction with a review of a targeted set of additional factors to reach a final performance score.

Retail Services and Products Test.  The test would have the following two prongs:

  • A  delivery systems prong that would evaluate three components of a bank’s performance: (1) branch availability and services, (2) remote service facility availability, and (3) digital and other delivery systems.  For large banks with assets of $10 billion or less, only the first two components would be evaluated unless the bank requests consideration of its digital and other delivery systems and collects the required data.
  • A credit and deposits prong that would incorporate qualitative factors to separately evaluate the responsiveness of credit products and programs to the needs of LMI individuals, small businesses, and small farms and the responsiveness of deposit products to the needs of LMI individuals.  Both credit and deposit products would be assessed at the institution level and would be required for large banks with assets of more than $10 billion.  For banks with assets of $10 billion or less, only the responsiveness of credit products and programs would be required.

Community Development Financing Test.  The test would consist of a community development financing metric, benchmarks, and an impact review.  These components would be assessed at the facility-based assessment area, state, multistate MSA, and institutions levels as follows:

  • The community development financing metric would measure the dollar amount of a bank’s community development loans and community development investments, together, relative to the bank’s capacity, as reflected by the dollar value of its deposits.  Under the current approach for large banks, community development loans and investments are evaluated separately.  The financing metric would be the ratio of a bank’s community development financing dollars (numerator) relative to deposits within a facility-based assessment area (denominator).  The numerator would be a bank’s annual average of dollars of community development financing activity in each assessment area.
  • The benchmarks would consist of one local and one national benchmark for each assessment area.  The agencies would compare the bank assessment area community development financing metric to both benchmarks to help inform its assessment area scores.  Both benchmarks would be based on the aggregate amount of community development financing activity relative to the aggregate level of capacity, based on deposits, of all large banks and, as applicable, intermediate banks in each bank assessment area, or nationwide. 
  • To evaluate the impact and responsiveness of a bank’s community development activities, the agencies would use defined impact factors.  Due to the current lack of data, the process would initially be primarily qualitative in nature, with the agencies considering the percentage of the bank’s activities that meet each impact factor but not using multipliers or specific thresholds to directly tie the impact review to specific scores. Impact factors would include whether the activities serve persistent poverty counties, serve geographic area with low levels of community development financing, serve low-income individuals and families, or support small businesses or small farms with gross annual revenues of $250,00 or less.

Community Development Services Test.  The test would consist of a primarily qualitative assessment of a bank’s community development service activities.  For large banks with assets of over $10 billion, the agencies would use a metric to measure the hours of community developments services per full time equivalent bank employee.  Community developments services would be evaluated in facility-based assessment areas, in eligible states, multistate MSAs, and nationwide.  The proposal would retain the current definition of such activities to include activities that have as their primary purpose community development and are related to the provision of financial services.  Activities that reflect other areas of expertise of bank employees such as human resources, information technology, and legal services would also be considered to be related to the provision of financial services under the proposal.  In nonmetropolitan areas, banks can receive credit for certain volunteer activities that meet an identified community development need even if unrelated to financial services.  The evaluation for all large banks would include a qualitative review of the extent to which the bank provides community development services, as well as the impact and responsiveness of the activities to community needs.

Assigned Scores and Ratings.  Performance scores would be assigned for each applicable test at the state, multistate MSA, and institution level based on a weighted average of assessment area scores as well as consideration of other additional test-specific factors.  The proposal provides that the agencies would combine these scores across tests to produce ratings at the state, multistate MSA, and institution level, and would use an evaluation framework  with specific weights attributed to each performance test which vary based on the bank’s asset size.  For large banks, the heaviest weight would be given to the Retail Lending Test (45%), with different weights attributed to the Retail Services and Products /test (15%), Community Development Financing Test (30%), and  the Community Development Service Test (10%).  For intermediate banks, tests would be weighted equally between the Retail Lending Test and the current community development test (or Community Development Financing Test when elected by a bank).